A person who is unable to service his or her debts and cannot enter into a payment arrangement with his or her creditors, may contemplate declaring bankruptcy. Before bankruptcy is seriously considered, it is advisable to first try to pay off the debts or reach some sort of agreement with creditors so that a repayment scheme can be entered into. Declaring bankruptcy will ordinarily impact on the quality of life that the potential bankrupt has become use to, and may impact that individual’s scope of future employment or capacity to conduct business.
Although there are benefits to bankruptcy, mostly associated with freeing the debtor from being pursued by creditors and allowing him or her to re-establish a balance in his financial life, the decision should not be taken lightly.
The matters discussed below primarily relate to voluntary bankruptcy. For information about involuntary bankruptcy, where a creditor has issued a bankruptcy notice or a creditor’s petition against the debtor, see our section titled “Bankruptcy Notice.”
The process of becoming Bankrupt:
In the event that a person cannot repay his or her debts, he or she will have the option to declare bankruptcy, which is known as a voluntary bankruptcy, or possibly face the risk of having his or her creditor commence bankruptcy proceedings in the Federal Court.
A voluntary bankruptcy is commenced by completing a Debtor’s Petition and filing it with the Insolvency and Trustee Services Australia. ITSA will then consider the Petition and the matters that it outlines, such as the debts that remain outstanding and form a view whether or not to allow the voluntary bankruptcy to proceed. In the event that it does allow for the bankruptcy, correspondence will then be issued to the bankrupt giving notice of the decision and outlining his or her rights and obligations.
Although there is no minimum amount of debt for the potential bankrupt to declare bankruptcy, there is a threshold limit of minimum debt where a creditor seeks the Court’s intervention. A Court may also refuse to allow a person to declare bankruptcy in certain situations. This is to prevent an individual from exploiting the system by pursuing bankruptcy so as to avoid his creditors.
Once a bankruptcy is made, a trustee will be appointed to manage the bankrupt’s property and debts. It will be the responsibility of the trustee to ensure a fair and equitable distributions of available funds to creditors to settle as much of the outstanding accounts as possible.
What to consider before declaring Bankruptcy:
The main concern that a potential bankrupt will have is the inability to settle outstanding accounts and the resulting hassle of being pursued by creditors. This can understandably be the cause of a great deal of stress and anxiety.
Bankruptcy will prevent creditors from commencing legal action against the bankrupt debtor for the recovery of their debts. This can be a tremendous relief and allow the bankrupt debtor the opportunity to take stock and reassess his professional life and financial management. It does not however relieve the debtor from the debt.
Bankruptcy will also have other ramifications on the bankrupt’s ability to travel. Passports will have to be surrendered to the trustee. This prevents the risk of desperate individuals fleeing the jurisdiction to avoid their legal liabilities and obligations to their creditors.
Other matters that a potential bankrupt will have to consider include the following:
- The Bankrupt will have to declare any changes in personal details, including name alterations and changes to residential address;
- Gifts and windfalls much be declared;
- The bankrupt may be required to give evidence in Court;
- A liability or severe fine or imprisonment may be imposed by the Bankruptcy Act 1966 (Cth) for breaches of any term or provision thereof; and
- Bankruptcies will be listed for a period of seven years on credit reporting registers.
As a result of the above considerations, bankruptcy should not be approached in a cavalier fashion and other options should be pursued first. For more information, see our titles on Debt Agreements and Debt Consolidation under “Credit Defaults & Credit Repair Law” for other alternatives that may be more appropriate to a potential bankrupt’s situation.
Property that may be affected by Bankruptcy:
The provisions of section 116(1) of the Bankruptcy Act 1966 (Cth) outline the types of property that can be used by the trustee with a view to settling the outstanding debts owed to creditors. This property can include any of the following categories:
- Any property that belongs to the bankrupt at the time of the bankruptcy;
- Any property that was vested in the bankrupt at the time of the bankruptcy;
- Any property that was acquired by the bankrupt after the commencement of the bankruptcy;
- Any property that devolved on the bankrupt after the commencement of the bankruptcy;
- Any power to exercise over property by the bankrupt, before and after the commencement of the bankruptcy but not after the discharge of bankruptcy;
- Any property that is vested in the trustee of the bankrupt’s estate; and
- Any money that is paid to the trustee of the bankrupt’s estate (pursuant to orders made under certain provisions of the Act);
These kinds of property are know as “divisible” among the creditors of the bankrupt. For exceptions to these, see below.
Property not affected by Bankruptcy:
There are exceptions to the kinds of property that will be divisible among the creditors of a bankrupt. Under section 116(2) of the Bankruptcy Act 1966 (Cth) the following kinds of property will be excluded:
- Any property that the bankrupt is holding on trust for the benefit of another person;
- Household property that is identified in the Bankruptcy Regulations 1996 (Cth) or that is declared to be exempt by the Creditors in meeting;
- Personal property of sentimental value that is exempted under the Regulations of by the Creditors in meeting;
- Personal property that is used for a trade or income by personal exertion, of a maximum value determined by the Regulations, determined by the Creditors in meeting or by order of the Court;
- Personal property used for transportation within the limits imposed b the Regulations;
- Interests in respect of insurance policies, superannuation and other payments under other legislative schemes such as the Family Law Act 1975 (Cth), but subject to various other provisions of the Bankruptcy Act 1966 and Regulations;
- Any interest in respect of a right to recover damages or compensation for personal injury or death of the bankrupt, a spouse or a de factor partner;
- Amounts paid under a rural support scheme in certain situations; and
- Any property that ought to be transferred to another person under the terms of a Binding Financial Agreement under Part VIII of the Family Law Act 1975 (Cth);
In the event that the bankrupt is unhappy or otherwise concerned about how his or her property is being dealt with by the trustee, it may be possible to make submissions to a higher authority and seek the exclusion of some property from being divided among creditors. For this to succeed, the property would have to fall into one of the exemptions listed above. For more information, see below under “Taking action against a Trustee.”
Affect of Bankruptcy on income contribution:
In the event that your income is above the proscribed indexed income amount, you may fall under the category of a high income earner, and thus may be liable to pay up to 50% of your excess to the trustee. The trustee will then use that amount to settle any outstanding accounts of your creditors. The “actual income threshold amount” is used as the figure to calculate your repayment liability. The figure is your total income (including pay and other benefits such as subsidized housing and transport) with the following subtracted:
- Income tax;
- Medicare payments;
- Child support; and
- Maintenance.
The trustee will have the powers to seek a garnishee order so that your employer pays the trustee directly any amount under income contribution. Your creditors will not, however, have this power.
Affect on Bankrupt’s employment and business:
Some types of employment will not be available to a bankrupt. Be that as it may, bankruptcy is a private affair that is disclosed only to those parties that have an interest in the bankruptcy proceedings: the trustee and the creditors. An employer may be made aware of a bankrupt’s bankruptcy in certain situations however, such as:
- When the bankrupt employee is issued shares;
- When the bankrupt employee owes money to the employer;
- When the bankrupt employee fails to make a statutory payment; and
- When the bankrupt employee is liable to make income contributions to the trustee, fails to do so and the trustee seeks a garnishee order.
Affect on banking and future credits and loans:
A bankrupt has a right to maintain a bank account, but this will have to be with the consent of the banking institution. Moreover, the trustee will be able to make a claim on any amount that is in the bank account at the time of bankruptcy, as well as any accrued amount of money that is deposited into the account in the duration of the bankruptcy.
There is a prescribed limit on the amount of credit a bankrupt can use. If credit is obtained above that amount, or if a loan is obtained in breach of the Bankruptcy Act 1966 (Cth) the bankrupt may be guilty of a serious offense. Creditors should be notified of loans above the prescribed limit. Failing to disclose intended loans of this magnitude to the creditors can become a very serious matter.
As the bankrupt may have found himself in an insolvent position through poor commercial judgment, the law may not be sympathetic in cases where further debts are accrued during the term of the bankruptcy. It is therefore important that if a bankrupt feels he may be in breach of the terms of his bankruptcy or any legal requirement or statutory prohibition, legal advice should be obtained as a matter of urgency so as to minimize the damage done and the possible legal liability that will arise.
Length of time of Bankruptcy:
A bankruptcy can come to an end in various situations:
- The term of a bankruptcy will ordinarily be three years, however, this period can be extended by the trustee to five or even eight years in certain situations, such as:
- Where it becomes evident that not all debts have been disclosed;
- Where it becomes evident that a beneficial interest in property has not been disclosed;
- Where the bankrupt has failed to attend a creditor’s meeting;
- Where the bankrupt fails to make a mandatory payment;
- Where the bankrupt fails to return to Australia when required;
- Where the bankrupt fails to provide other material details such as income and property ownership; and
- For any other examples of misconduct.
- The bankrupt may discharge his liabilities to the creditors, with all debts being paid and accounts settled;
- The Creditors in meeting can pass a resolution to the effect that the bankrupt is no longer bound to repay any outstanding loans or liabilities; and
- A successful action in Court for the annulment of the debt for a failing in the legal procedures.
Taking action against a Trustee:
It is ordinarily advisable to obtain professional legal assistance and representation before making any claims or submissions in respect of a trustee’s allegedly adverse dealings with the bankrupt’s property. An application can be made to the Inspector General as well as the Federal Court or the Federal Magistrates Court. Legal advice will consider a detailed analysis of the law as it is applied to the specific facts of a given case.
As Courts do their work over time, decisions and determinations result in a constantly expanding body of rules and regulations. A lawyer will need to have regard to these so as to ascertain what remedies are available to the bankrupt as he or she seeks to minimize the divestment of his or her property among creditors.
A bankrupt may feel disempowered, but he or she will still have rights which can be prosecuted at law. In the event that a bankrupt feels that he or she is being hard done by, it is important not to ignore any matter that may have a potentially significant impact on the bankruptcy itself and the bankrupt’s ability to recover after the process is complete.
If you are a bankrupt and you are requiring legal advice to understand your rights and obligations, you may wish to make an appointment with one of our Bankruptcy & Insolvency Lawyers by contacting us by telephone on (02) 9233 4048 or email to info@navado.com.au. We look forward to being of assistance to you.
This webpage (and any material or wording appearing on this webpage) is provided for general information purposes only and does not constitute any Legal Advice. It does not take into account your objectives, your instructions or all of the relevant facts and/or circumstances. Navado accepts no responsibility to any person who relies on the information provided on this website. We further refer you to our Disclaimer.
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